On Thursday, the South Korean won remained under heavy pressure, falling to its lowest level in over 16 years despite renewed verbal intervention signals from the authorities, highlighting the systemic pressure facing Asian currencies amid the Middle East conflict.
The won fell as much as 1.4% against the US dollar to a low of 1,540.55, its weakest level since March 2009. Meanwhile, foreign investors sold a net $4.6 billion worth of South Korean shares in a single day as progress in Israeli-Palestinian peace talks remained elusive, bringing the year-to-date net selling total to $74 billion.
Earlier that day, South Korea's Finance Minister, Koo Yun Cheol, stated that the authorities were closely monitoring foreign exchange market movements with high vigilance to prevent the spread of market panic and pledged to take swift and necessary measures in the event of excessive volatility.
However, these remarks failed to effectively boost market confidence.
External Shocks Dominate, Limiting Policy Options
The ongoing escalation of Middle East tensions and high oil prices are exerting sustained pressure on the currencies of major Asian importers, with South Korea being no exception. Authorities in Indonesia and the Philippines have similarly stepped up efforts to defend their currencies recently.
So Jaeyong, Chief Economist at Shinhan Bank, noted that while authorities have done what they can, it is very difficult to effectively control the exchange rate given that the won's weakness is primarily driven by external factors.
This situation has also placed South Korean authorities in a delicate position. The domestic stock market has performed strongly due to robust retail demand, but the sharp rally in stocks has prompted foreign investors to take profits and rebalance their portfolios, further intensifying volatility in the foreign exchange market.
The government acknowledged in a statement that despite the current account surplus reaching a record high, foreign exchange market volatility is rising, with the aforementioned two factors being key reasons.
Hawkish Fed Expectations and Foreign Selling Pressure Weigh on Won
Choi Kyuho, an economist at Hanwha Investment & Securities, pointed out that the outlook for the US Federal Reserve's policy remains hawkish ahead of its year-end meetings, coupled with continued large-scale foreign selling of South Korean stocks, creating a challenging backdrop for the won.
He expects the won could weaken further to around 1,550 in the near term. So far this year, the won has depreciated by more than 6%.
Meanwhile, linked pressure has emerged in the bond market, with the yield on South Korea's 3-year government bonds rising 9 basis points to 3.86% on Thursday. Notably, due to a local election, the South Korean market was closed on Wednesday, leading to particularly concentrated volatility upon reopening on Thursday.
Authorities Respond on Multiple Fronts, Stepping Up Bond Market Monitoring
In a written statement following a regular meeting with the Bank of Korea Governor and other officials, Finance Minister Koo Yun Cheol stated that the government will also closely monitor the bond market and respond promptly to excessive volatility through close communication with market participants.
The last time South Korean authorities issued a verbal intervention warning was on May 22, when they characterized the won's movements in a rare joint text message as "excessive volatility deviating from economic fundamentals."
Regarding the bond market, the government has reduced its June treasury bond issuance by 21% compared to May and has intensified monitoring through daily phone calls and private messaging groups.
Analysts believe that without a substantive improvement in the external environment, verbal interventions and marginal policy adjustments alone are unlikely to fundamentally reverse the won's depreciation trend.
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